Orion Engineered Carbons SA :OEC-US: Earnings Analysis: Q1, 2016 By the Numbers : May 23, 2016

Orion Engineered Carbons SA reports financial results for the quarter ended March 31, 2016.

We analyze the earnings along side the following peers of Orion Engineered Carbons SA – Methanex Corporation, Calgon Carbon Corporation, Balchem Corporation and Canexus Corporation (MEOH-US, CCC-US, BCPC-US and CXUSF-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 271.49 million, Net Earnings of USD 14.73 million.
  • Gross margins widened from 28.36% to 33.13% compared to the same period last year, operating (EBITDA) margins now 21.39% from 18.52%.
  • Year-on-year change in operating cash flow of -23.35% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings decline largely a result of non-operational activity, pretax margins improved from 7.69% to 8.76%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-03-31 2015-06-30 2015-09-30 2015-12-31 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 326.47 312.34 309.73 284.97 271.49
Revenue Growth (%YOY) -27.9 -33.26 -29.11 -28 -16.84
Earnings (mil) 16.58 16.13 13.4 1.63 14.73
Earnings Growth (%YOY) 3095.7 282.51 124.79 115.69 -11.14
Net Margin (%) 5.08 5.16 4.32 0.57 5.43
EPS 0.28 0.27 0.22 0.02 0.24
Return on Equity (%) 88.7 84.12 83.3 11.64 111.39
Return on Assets (%) 5.51 5.58 4.7 0.59 5.49

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Market Share Versus Profits

Revenues History
Earnings History

OEC-US‘s change in revenue this period compared to the same period last year of -16.84% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that OEC-US is holding onto its market share. Also, for comparison purposes, revenues changed by -4.73% and earnings by 804.74% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 28.36% to 33.13%, while operating margins improved from 18.52% to 21.39% over this period. For comparison, gross margins were 30.13% and EBITDA margins 17.47% in the immediate last period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

OEC-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 72.93 days from 84.16 days for the same period last year.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

OEC-US‘s change in operating cash flow of -23.35% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s earnings decline is largely a result of non-operational activity. As a matter of fact, the company showed increases in operating (EBIT) and pretax margins. EBIT margins improved from 12.79% to 13.44% and pretax margins widened from 7.69% to 8.76%.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

Orion Engineered Carbons SA supplies carbon black. Its carbon black is used as a performance additive in coatings, polymers, printing and special applications, and in the reinforcement of rubber in tires and mechanical rubber goods. The company’s Gas Blacks, Furnace Blacks and Specialty Carbon Blacks tint, colorize and enhance the performance of plastics, paints and coatings, inks and toners, adhesives and sealants, tires, and manufactured rubber goods, such as automotive belts and hoses. It operates through two reportable segments: Rubber Carbon Black and Specialty Carbon Black. Orion Engineered Carbons was founded on April 13, 2011 and is headquartered in Luxembourg.

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